Avista Corporation

Welcome to the Avista Corporation Second Quarter 2019 Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Mr. John Wilcox. Mr. Wilcox, you may begin.

Thanks, Hilda. Good morning, everyone, and welcome to Avista's second quarter 2019 earnings conference call. Our earnings were released pre-market this morning and are available on our website. Joining me this morning are Avista Corp. Chairman of the Board and CEO, Scott Morris, Avista Corp. President, Dennis Vermillion, Senior Vice President and CFO, Mark Feast, Vice President, External Affairs and Chief Customer Officer Kevin Christie, and Vice President and Controller Ryan Crassel. I would like to remind everyone that some of the statements that will be made today are forward-looking statements that involve assumptions, risks, and uncertainties which are subject to change. For reference to the various factors which could cause actual results to differ materially from those discussed in today's call, please refer to our 10-K for 2018 and 10-Q for the second quarter of 2019, which are available on our website. To begin this presentation, I would like to recap the financial results presented in today's press release. Our consolidated earnings for the second quarter of 2019 were $0.38 per diluted share, compared to $0.39 for the second quarter of 2018. For the year to date, consolidated earnings were $2.14 per diluted share for 2019, compared to $1.22 last year. Now I'll turn this session over to Scott.

Well, thank you, John. And good morning, everyone. As we have previously announced, I will be retiring effective March 1 2020. And Dennis Vermillion will be taking over as CEO on October 1 2019. I've been honored to lead this company and serve alongside exceptional and dedicated employees for nearly 40 years. I'm incredibly proud of what we've accomplished together and look forward to continuing my service on the Avista board as this company continues to achieve great outcomes for those it serves. We've been diligent and deliberate in the succession planning of our company over the years, and I have every confidence in Dennis as the next CEO and his ability to successfully lead Avista into the future. Dennis has clearly demonstrated his commitment to this company and his deep leadership experience and extensive expertise in all aspects of the company positions him well to shape the next evolution of the company. Earlier this year, we were proud to celebrate Avista's 130th birthday. To mark this historic event, Avista made a commitment of $7 million to fund initiatives that strengthen our local communities. This major philanthropic contribution is the latest example of Avista's long rich tradition of championing the communities we serve. For decades, we've worked side by side with our community members to make the places where we live better, stronger, and more resilient. We'll infuse $7 million into our communities over the next three years. It's earmarked to focus on three initiatives. First, homelessness. We know communities both large and small face this complex issue, and VISTA wants to help find solutions. Second, small-town pride. We want to strengthen communities by solving tough problems, building resilience, and continuing to care for our neighbors. And third, youth success. We recognize that today's youth face many challenges. That's why we're investing in initiatives that will set our youth on an exciting path for their future. We know that we can accomplish great things when we partner with each other, and I'm really excited about the possibilities. With regards to our quarterly earnings, We had a strong second quarter as our earnings benefited from lower operating costs and better-than-expected customer growth. These increases were partially offset by the donation commitment I just spoke about. AEL&P was slightly above our expectations and expected to meet our four-year guidance. At our other businesses, we completed the sale of our subsidiary, Metal FX, in the second quarter, which resulted in about a $2.3 million gain, and we also had earnings from some of our other investments. Regarding regulatory matters, in July, we were able to reach an all-party settlement in principle for the remaining issues of our natural gas general rate case in Oregon, and we expect to file this agreement later in August. In June, we filed an electric general rate case in Idaho, and we continue to work through the regulatory process in Washington. We expect these cases to provide rate relief in early 2020 and begin reducing the regulatory lag that we've been experiencing. Based on the 2019 results to date, for the full year of 2019, we are raising our earnings guidance by $0.05 per diluted share to a consolidated range of $2.83 to $3.03 per diluted share. This includes $1.01 per diluted share for the termination fee received from Hydro One in the first quarter, which was partially offset by the payment of remaining transaction costs. We're raising earnings guidance due to the gain of the sale of Metal FX and earnings from investments at our other businesses. And now I'm going to turn it over to Mark.

Thank you, Scott. Good morning, everyone. I just want everybody to mark October 4th on their calendars as the Blackhawks open in the Czech Republic against the Philadelphia Flyers. So it's a good date to get on your calendars early. For the second quarter of 2019, Avista Utilities contributed $0.32 per diluted share compared to $0.37 last year. And on a year-to-date basis, Avista Utilities has contributed $2.02 per diluted share, an increase from $1.21 last year. The increase in the year-to-date was primarily due to the termination payment from Hydro One, as well as the positive impact of general rate increases in customer growth. And these increases were offset by transaction costs associated with Hydro One in that payment, and then increased transmission and distribution O&M and the donation commitment that Scott mentioned earlier. The IRM in Washington was a pre-tax benefit of $6 million in the second quarter compared to a benefit of $1 million in the second quarter of 2018. Year to date, we've recognized the benefit of $3.5 million compared to a $5.8 million benefit in 2018. We continue to be committed to investing the necessary capital in our utility infrastructure, and we expect Avista Utilities to have an increased capital expenditure of $435 million, and the $30 million increase results primarily from additional capital expenditures for a renewable integration, for a wind project, and additional customer growth. As of June 30th, we have $212 million of available liquidity under our credit facilities, and we expect to issue approximately $180 million of long-term debt and up to $65 million of equity in order to refinance maturing long-term debt, fund our additional capital expenditures and our existing capital expenditures, and then maintain an appropriate capital structure. This does represent an increase, as I mentioned, with the $30 million higher capital. As Scott mentioned earlier, we're raising our guidance to a consolidated range of 283 to 303 for diluted share, which is a five cent increase on both ends. And that increase includes the termination fee paid to Hydro One and the payment of transaction costs. And we're raising the guidance primarily because the gain on metal effects is now known. Typically, we don't include those in guidance until they're known and included in our results. And that occurred in the second quarter. Going forward, we continue to strive to reduce the regulatory timing lag and more closely align our earned returns with those authorized by 2022. To achieve this, we anticipate annual earnings growth of 9 to 10% from 2020 through 2022 with a return to normal 4 to 5% growth following 2022. And the earnings growth is calculated based on the midpoint of our original 2019 earnings guidance as a starting point, but also excluding the $1.01 termination payment from Hydro One. These growth rates really are the only way we achieve those if we get timely recovery in all of our jurisdictions from the rate cases that we've been filing and we expect to file. We expect the VISTA utilities to contribute in the range of $272 to $286 per diluted share, again, including the $1.01 transaction cost. The midpoint of our guidance does not include any expense or benefit under the IRB. We currently expect that to be in the 75-25 sharing band, which is expected to add approximately $0.05 per diluted share. Our outlook for VISTA utilities assumes, among other variables, normal precipitation, temperatures, and below normal hydroelectric generation for the remainder of the year. We're about 90% of hydro in our expectation for this year, so we do include that in our expectations. For 2019, we expect AELP to contribute in the range of $0.09 to $0.13 per diluted share, and our outlook there, again, assumes, among other variables, normal precipitation and hydroelectric generation for the remainder of the year. The change in our guidance is we expect our other businesses to contribute earnings in the range of $0.02 to $0.04 per colluded share, an increase of $0.05 from previous guidance, and again, due to the gain on metal FX sale, as well as other investment gains from our other business. Our guidance generally includes only normal operating conditions and does not include unusual items or settlements or acquisitions and dispositions until the effects are known and certain. I will now turn the call back over to John.

And now we will open this call for questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchstone phone. If you wish to be removed from the queue, please press the pound sign or hash key. If you are using a speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star and then 1 on your touch-tone phone. We have a question from Richard Sicciarelli from Bank of America, Maryland.

Hey, good morning. Can you hear me? Good morning. Yes, we can hear you. All right, great. Just wanted to touch on the recently acted Washington legislation. I know the Commission recently held a workshop on its implementation. Just curious if any feedback or sticking points thus far, and maybe specifically around the 2% cost cap.

Hi, this is Kevin Christie. Thanks for the question. The workshop really was a procedural workshop, and we didn't get into any of the details at that level, specifically the 2%.

Okay, so no initial feedback in general thus far, though?

No, we're really just talking about the process and the steps to move forward to implement.

Okay, got it. And separately, you know, you raised your guidance here largely on the Metal FX sale. And your other business, you raised it to $0.02 to $0.04 from a loss. I'm just curious how you're thinking about that going forward. Are you still expecting a loss on that business like you have been historically, or is there anything else to kind of consider?

Yeah. But big changes due to the gains. So, yeah, you know, you wouldn't expect a gain in the future of that, so that would be stripped out and we would be back. Now, we do expect those businesses as we go, you know, through the course of time to begin making money with the investments we've been making, especially with Energy Impact Partners has been successful in some of their early investments, and we continue to invest there. But you are correct. You strip that out and going forward, we do have some historical losses in that area. We expect that to continue.

All right. Great. That's all I had. Thanks a lot. Thank you.

The next question comes from Paul Patterson from Glenrock Associates.

Good morning, guys. Morning, Paul. So just to follow up on that, I guess, in terms of these investment – so you're not really expecting – How should we think in general about this business, I guess? You see the track basically going back to a loss. Is that what you're saying, and this is just sort of a one-time gain, or is there some portfolio management that we should be thinking about in terms of this business?

This is a very, very small piece of our business at times, and we invest in these investments. Many of them are in our local communities, and some of it's community development, and we have small losses. very small losses, and we did have a gain on this one. Metal FX is a legacy company. We've owned that for a very long time and exited with the gain, so it will revert to a small loss, but over time, we do expect those to turn profitable. It's just a very small part of our business, so we don't spend a lot of time on those. It's generally less than a nickel share. in our guidance. We expect that to continue if there was a loss, but we do expect as we move forward to generate gains through these investments that we're making today. So we do expect that to turn around, but we don't give guidance beyond the next year or two. We've given some growth rates now because of where we are with lag, but on the other businesses, we will ultimately expect that to get back to earnings, but in the near term, it'll probably revert to a small loss.

Okay, and then just in the release, there was discussion of the effective tax rate being negative 7.5%, and it seems that it's related to the settlement. And I apologize, but could you just elaborate a little bit more exactly what is going on with the tax rate and just sort of how it dovetails into the settlement, in other words, sort of the earnings impact associated with this, if it is any, and then just in general what the normalized rate What's the tax rate you see for 2019 and just sort of you're thinking about the tax rate in 2020 and beyond?

Well, I think the normalized tax rate we expect to see for the year is about 16%. So, you know, we did have some unusual things occur in the second quarter and, you know, they were offsetting some depreciation changes. So, you know, overall we, you know, the statutory rate's at 21%. We have some small state taxes in certain other states we have. We expect that, you know, probably to be in the 16% to 17% range as an effective tax rate over time.

Okay. And the negative 7.5%, could you just elaborate a little bit more what's going on there? In other words, did it have any earnings impact outside of the – it sounds like it was associated with the Coal Strip deal, and I apologize for not being on top of it, but could you just elaborate a little bit more what happened there?

Well, so, yes, we were offsetting additional depreciation at Coal Strip. So really it had no earnings impact.

Okay. And just in general, we should be thinking 16% to 17%, roughly speaking, on a normalized basis going forward?

Yes.

Okay. Thanks so much, guys.

Thank you, Paul.

The next question comes from Sophie Karp from KeyBank.

Hi. Good morning, guys. Can you hear me?

I don't know if you need to move closer or something. We can barely hear you.

Is this better?

Better.

Great. Thank you. Thanks for taking my question. Just real quick, obviously this year there's been a little bit of a noise in the numbers and you had the fee that you booked from the merger and then you have the gain on sale of this business. Could you maybe just crystallize a little bit better for us? What should we be thinking about what the earnings would have been without those items this year as a base for future growth? That's what we should be thinking as a base, right? So what would it have been without those items?

Again, you take out the $1 is the termination fee net of any costs associated with the termination fee. So you would take that out of the consolidated guidance and the utility guidance. And then you would also, you know, again, we raise guidance and nickel share largely due to the gain on metal FX and other earnings. So I would say just for ease of calculation, if you took out a nickel on the other, that would, you know, that would get you back to kind of a baseline. And then again, we do expect to have the higher growth as we get, as we trend towards getting back to earning our allowed return by 2022. So in 2020, we would expect to have that 9% to 10% growth off of the midpoint of our original guidance. And that takes off the $1.01 termination fee.

So $1.01 and the $0.05 from Metalex.

Well, it depends. If you're taking original guidance, you don't have to do the $0.05. If you take today's guidance, you do the $0.05 as well.

Gotcha. Thank you.

The next question comes from Vadula Murti from Avon Capital.

Good morning. Hi, Vadula. Just want to make sure I understood the answer to Paul Patterson's question. What you're saying is that the negative 7.5% tax rate is associated with a much higher depreciation expense such that if we go forward into the future, say 2020, and the tax rate normalizes, the associated higher depreciation expense goes away, and that's why there is no net income effect.

There's no net income effect in this quarter. Our depreciation in the future, again, will be impacted. I mean, you'll have some offset with the taxes in the future as you're continuing to roll forward a higher depreciation on coal strips. but that will be offset and it won't have the same impact on an annual basis as it happened to do in this quarter because we also had a one-time change there, so we were doing a little catch-up. Don't even think about it for the future. It's going to be offsetting any additional depreciation, accelerating that to 2025. So at this point, the taxes, it's this quarter that has the impact. and we'll provide, you know, our guidance for the future stands is what we've said. I'm not going to get into details of every line item event. It does not affect our guidance going forward.

Okay. And in terms of the contribution that was made, the $7 million, should we consider that as a one-time type of item, or is this something that periodically over every few years or something like that, as part of your community activities occurs. If you just help me think about that a little bit because just reading the release, it did strike me as a one-time item that I shouldn't be perpetuating in any material fashion.

No, the $7 million was a reflection of our 130th anniversary and we wanted to do something unique and impactful for the communities that we serve. That was a one-time contribution. In addition, though, we do have around $2 million a year that we do philanthropically, but we've done that really for the last 20 years. That one-time $7 million is a unique contribution.

It would be appropriate to... for an ongoing basis to at least remove that $7 million.

Yes.

Okay. Thank you very much.

Thank you, Madhul.

The next question comes from Chris Ellencoff from Williams Capital.

Hey, guys. Good morning. Morning, Chris. Can you give us any more color on the other non-regulated income that you discussed in the press release? And if you can, can you give us any kind of number on that?

Very small, and it's really just certain of the investments that we have. There's a number of them that kind of go both ways. They have valuations that increase or decrease, and recently we're starting to see more increases as we focus our strategy there. Historically, we've had losses there, but it's a very small number, Chris, so a penny or two maybe. at this point, so I don't really want to overstress that amount. We had the gain. That was the biggest driver, and we've got some small increases on the other investments. We do expect that to increase as we go through time, but currently it's not expected to be very large.

Okay. And I'm a little bit confused on the contribution. Was the full $7 million in the quarter? I thought Scott had said that would be over a three-year period.

Well, the cash impact will be over three years as it gets donated, but we took the expense because it went to the foundation. We invested in the foundation, so we took the expense in the quarter.

Okay. And based on the Idaho filings, can you give us a sense of what your thoughts are on what the gas business in Oregon or in Idaho is going to earn this year? I'm sorry.

Well, we're not I mean, you know, we did not file a gas case in Idaho. So by default, we believe we are earning at or near our allowed return, because we didn't file a case needing additional, you know, additional earnings or recovery of costs. So that that would be our view on that we only file an electric only in Idaho.

Yeah, that's kind of what I was getting at is I thought you had filed a notice of intent but never filed a case. So I just wanted to check and make sure your thought process had changed at some point.

No, our thought process is always that way. If we feel we're earning our allowed return or have the ability to earn our allowed return, we don't file a case. But in situations as we continue to grow our capital budget and grow our rate base, we need to file a rate case to have the opportunity to earn an allowed return on those costs. So In this case, when we did the numbers and ran the numbers for Washington, Oregon, and Idaho, in all other cases, we filed a case except for Idaho natural gas.

Okay. So when you filed the notice of intent, you weren't sure where you were expecting to go?

We didn't know if we had it specifically. We had to run the numbers and get the allocations between Washington and Idaho. But we have to file that notice of intent so we have the ability to file a rate case to have the ability to get recovery data. by January 1 to be efficient.

Right. Gotcha. Also, is it possible to give any color on the Oregon settlement prior to its filing? No.

I mean, other than saying we filed that the parties have reached an agreement in principle, all the parties, and until that's filed with the commission, we're not going to provide that. We expect that this month, so we're not making you wait too long.

Okay. Thanks for the details. Appreciate it. Thanks, Chris.

Thank you. As a reminder, if you have any questions, please press star one. The next question comes from Andrew Levy from Exodus Point.

Hi, guys. Just have a quick question. How are you? Good. Just on the 2% cost cap, I'm just not familiar with that. If you could just explain that. That's my only question.

Hi, this is Kevin Christie. We have in the legislation that we saw passed in Washington to the extent that the utility is incurring costs related to complying with the legislation or the law. If those costs exceed 2%, we can provide notice of a need to back off on the spending and compliance if it has that kind of impact to customer rates. And that is, again, specific to complying with the energy legislation, the clean legislation.

Okay. So, I'm sorry. I'm just a little confused. You can raise your rates more than 2%, but if costs go up 2%, you can ask for more. Is that what you're saying?

If costs go up by more than 2%, i.e., we're having a difficult time complying at 2% or less, then we can file with the commission to not move forward with the additional spending.

Oh, you mean like CapEx?

Yes, CapEx. or if the costs are related to the EPA.

But that's just for renewable. That's not overall, though, right?

Correct, for the clean legislation.

Right, okay, so it's just for the clean legislation. I got it. Okay, good. Thank you very much. Thanks, Andy.

Mr. Wilcox, at this moment we show no further questions. Do you have any final comments?

Yes. I want to thank everyone for joining us today. We certainly appreciate your interest in our company. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.